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Apple: 3 Numbers You May Have Missed

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I've seen a lot written about Apple (NASDAQ: AAPL) and their last earnings report. Some analysts suggested that Apple stock was too widely held. Many have also said that this was an adjustment in expectations and not a real problem. Amongst all of the hoopla around Apple's earnings reports, there are three specific numbers that investors might have missed, and their effect on the stock's value could be profound.

The Landscape Today
Just a few years ago Apple's biggest competitor in the smartphone space was BlackBerry (NASDAQ: BBRY). BlackBerry used to own more than 40% of the smartphone market. Today, the new BlackBerry 10 devices and software will need to help the company try to finish in third place. However, with just 6.9 million smartphones shipped in the last quarter, BlackBerry is generating tiny sales compared to the over 47 million iPhones Apple sold in the same timeframe. 

Nokia (NYSE: NOK) is another of the old guard that used to be synonymous with cell phones. The company still sells more cell phones than Apple in a quarter, but only 6.6 million smartphones. Of their smartphone sales, Nokia is one of the biggest backers of Microsoft's (NASDAQ: MSFT) Windows Phone 8, and shipped 4.4 million of their Lumia devices last quarter. This sounds good, until you realize that Google's Android system activates this many devices in about three days.

On the other end of the spectrum are Samsung and Apple. To get an idea of their dominance, a recent USA Today article claimed that worldwide smartphone shipments rose 36% in the last three months of 2012. Samsung took 29% market share with Apple close behind at 22%. Some analysts believe Apple's challenges are related to Samsung, and the loss of some "cool" factor. However, there are some specific issues that explain why the company's earnings growth slowed down.

Macs, Minis, And iPods Oh My
Most people have suggested that lower Mac sales were the primary culprit in why Apple had higher revenue, but lower margins. While there is no question lower Mac sales changed the equation, this ignores iPod sales, and the effect of the iPad Mini. Mac and iPod sales are being cannibalized by iPhone and iPad sales. While Apple is fine with this occurring, investors need to adjust their expectations until this relationship stabilizes. 

It's really no surprise that Mac sales were down 21% and iPod sales dropped over 17%. As smartphones and tablets become more popular, iPhones replace iPods and iPads replace Macs. The perfect example is in my own home. My wife's main computer is an iPad, in the past it would have been a laptop. I used to own a traditional iPod and cell phone, until I purchased an iPhone that could serve both purposes.

One thing investors may have missed is the significant drop in average price per unit in the iPad segment. Last year Apple sold 15.4 million iPads at an average price of $568 per unit. This year the company sold 22.9 million iPads at an average price of $467 per unit. With a 17.78% drop in average price, it's no wonder the company's margins and earnings were down. It's very difficult to sell millions of units at a lower price and grow your overall numbers. However, this is a short-term challenge and not indicative of lack of demand.

Earnings Are One Thing, Cash Flow Matters More
While Apple's slight decline in EPS has been widely reported, investors should look at Apple's cash flow before they assume there is a problem. While EPS was down 0.43%, the company's operating cash flow was up 33.45%. Even with this impressive growth, Apple can actually take a lesson in efficiency from some of its rivals. 

In the last few months, Apple generated about $0.16 of free cash flow per dollar of sales. While Nokia is still reporting negative free cash flow, BlackBerry actually generated $0.37 of free cash flow per dollar of sales. Microsoft of course is more of a software company, but their foray into tablets with the Surface, could lead to more device sales in the future. Microsoft is a virtual cash machine generating $0.49 of free cash flow per dollar of sales. That being said, neither BlackBerry, Nokia, or Microsoft can come close to matching Apple's revenue or earnings growth in the last few years.

So What Now?
One other number investors should look at is Apple's free cash flow payout ratio. With over $21 billion in free cash flow and under $2.5 billion in dividend payments, the company's ratio is less than 12%. Say what you will about Apple, but this means billions to spend on share repurchases, higher dividends, or acquisitions. The recent drop in Apple's stock price has pushed the yield above 2%, and relative to Microsoft's free cash flow payout of 50.21%, it looks like Apple can deliver more value to shareholders. 

In a strange way, this last quarter might be the best thing that has happened to Apple. Analysts have slashed their growth forecasts to 13.77% EPS growth in the next few years, whereas just a month ago this figure was 20%. However, even with this “disappointing” quarter, the company still beat expectations over the last four quarters by $1.47 per share. If you look at their competition, the value in Apple shares is hard to argue.

Nokia sells for 23 times even 2014 estimates and yet is expected to grow by just 5%. BlackBerry is expected to lose money for the next two years. Microsoft actually sells for nearly the same multiple as Apple, yet that company is expected to grow earnings by 8.2% versus 13.77% at Apple. Apple's two most popular products sold 29% and 48.7% more on a year-over-year basis. The stock is cheaper than it was, and cheap relative to even this reduced growth rate. What part of these numbers says investors should be disappointed?


MHenage owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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